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CFA Level I · CFA Level I Exam · Alternative Investment Features, Methods, and Structures

Which of the following best describes a typical feature of the due diligence required for an investment in a private alternative fund compared with a publicly traded mutual fund?

Due diligence for private alternative funds is typically more extensive. Limited disclosure, infrequent valuation, illiquidity and complex legal and fee structures require investors to examine the manager, strategy, operations and terms in depth, unlike public mutual funds with daily prices and standard regulation.

  1. AIt is shorter because audited prices are published daily
  2. BIt is more extensive because of limited disclosure and complex structuresCorrect
  3. CIt is unnecessary because managers are closely regulated

Explanation

Limited transparency, illiquidity, bespoke terms and operational complexity mean investors must investigate manager, strategy, valuation and legal terms more deeply. Daily audited prices and uniform regulation are typical of public funds, not private ones.

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